What method estimates inventory by using the previous year's percentage of gross profit on operations?

The method that estimates inventory by using the previous year's percentage of gross profit on operations is known as the Gross Profit Method of Estimating Inventory. This method is particularly useful for businesses that do not maintain a perpetual inventory system or prefer to take a more straightforward approach to estimate their inventory levels at the end of an accounting period.

Under this method, the calculation involves using historical data to determine the cost of goods sold (COGS) based on the previous year's gross profit percentage. By applying this percentage to the current year's sales, a business can estimate its inventory by subtracting the estimated COGS from the total sales, thereby allowing for a reliable approximation of inventory levels without a physical count. This approach is efficient and can help businesses make timely financial decisions, especially when circumstances do not allow for an accurate physical inventory count, such as during busy seasons or in the event of a disaster.

Other methods listed, such as Weighted Average, Last In, First Out (LIFO), and First In, First Out (FIFO), do not rely on gross profit percentages for inventory estimation. Instead, they involve cost flow assumptions based on the actual cost of the inventory items, which means they are more focused on the specifics of inventory management rather than using historical gross